interviews

Cautious Optimism: An interview with Bruce Davis of Abundance Investments

Ethical investment company Abundance Investments was present at the UK Conservative Party conference in Birmingham this week when Greg Clark, Secretary of State for Business, Energy and Industrial Strategy, gave a speech celebrating the UK’s position as a leader in low carbon technologies.

In response, Abundance Investments co-founder and joint MD Bruce Davis commented that Mr Clark is “right to see the Green Economy as pivotal to the UK’s future” given that “over the last decade, renewables have grown to now generate more than 25 percent of the UK’s annual electricity, and efficiency is improving increasingly rapidly.”

REM decided to talk to Mr Davis and find out more about Abundance Investments and how the company views the UK clean energy sector at present.

Tell me about Abundance Investment and what it does

We are a crowdfunding platform. We fund renewable energy projects and other infrastructure in the UK using money invested directly by ordinary people. They invest usually into a debt security debenture that pays a good turnover up to 20 years and the minimum investment is £5. So far we’ve funded about £20 million of projects ranging from wind, solar, biomass and other forms of renewable energy generation.

What is the Renewables Taskforce?

This is a group formed of and convened by WWF and Friends of the Earth to get across utilities, green developers, to come up with a single voice on green policy and green industry issues to the government. One of the things they want to do in that taskforce is to present an evidence narrative, rather than a fiscal one, to choices which the government is faced with over the next few years, across a range of things from access to markets, market incentives, any form of subsidy or contracts for difference, that sort of thing, to try and tie a complex narrative to something quite simple and straightforward in terms of policy choices.

What is your assessment of the UK renewables market at the moment?

I would say cautious optimism at the moment. The reason being that the economic headwinds have reversed, such that we’re in a world now where we are competing on an equal basis with other forms of generation. I guess whereas we were going to government or and saying we need support for development to become competitive, we’re now saying let us be competitive. I think that’s a very different thing for government to respond to.

We have to be realistic, the energy market is highly regulated, like financial services. Parliament has an impact on the way the market operates at a much more detailed level than many of the other markets, and so that relationship is really important for how the market will grow and for the mix of energy generation that is created. Sometimes in the past there’s been a confused narrative between wanting market forces to drive the direction but at the same time making some fairly critical decisions about what that direction should actually be. That’s created some fairly complex things, a lack of clarity about where exactly we should be investing our money. I think that cautious optimism is tempered by the fact that these are long-term investments and long-term commitments that we’re making to the UK economy with investors investing up to 20 years. We need some stability of framework, some stability of policy in order to make those investments, otherwise they won’t happen.

With Greg Clark’s announcement, we feel that the transformation of the economy from one dependent on fossil fuels to one dependent on the blending of renewable resources is, for us, a good signal but if they could give us something concrete on that, like how they are going to support it.

Do you think recent cuts were advantageous in some ways or a hindrance?

It’s all about the manner of them really. We still don’t get much clarity in terms of forward policy. Some of the changes around RHI and so on are a case in point. Ministers are being asked to pivot repeatedly in response to changes in government policy and that has not been good for investment. From a relative perspective, we are less worried about the projects we’ve built, we see more issues in terms of the projects entering the pipeline that we want to look at to invest. The more momentum the market has, the better quality of investments coming through.

So we’re very keen to see the government, first of all, deciding what it wants to achieve, second, some sort of timeframe and then getting out of the way so we can get on with it. A lot of the interventions have been rather short-term, so often the government gets accused of being short-termist. I think the opposite is true here in that the market wants long-term stability, it wants to know what rules it is operating under and that those rules are fair, that they treat all technologies the same, and then we can get on and compete. What we’ve been seeing is quite short-term shifts of policy and emphasis which is quite destabilising. We’re now talking about the size of investments where that is not conducive to delivering the goal. If the goal is to make the green economy central to the UK economy, then it won’t be achieved by a lot of short-term initiatives, it will be achieved by a long-term framework that we can better understand and work with.

Even if you’re looking at gas, a Combined Gast Turbine is a 10-year process to build. That is two and a half governments. The politicians aren’t working on that timeframe and us as investors have to try and transcend that short-term politics.

DECC’s replacement by BEIS – a good idea or not?

I don’t think it’s a good idea if we haven’t got clear lines, or responsibilities, marked out within BEIS. It isn’t entirely clear how things have been divided up. The ministers will have a number of priorities, but I think it’s a good idea to bring the question of energy back into the question of the broader economy. DECC sometimes suffered from being seen as a special case outside of economic decisions, particularly from the Treasury’s point of view. It was seen as a cost, not an investment. Now, within BEIS, it will hopefully be seem more as investment within UK infrastructure. That will be a benefit, but the drawback is that there was a lot of specialist knowledge within DECC and I know from talking to civil servants that a lot of that has now been dispersed within Whitehall, so we’ve probably lost some knowledge within Whitehall about how best to promote and regulate the energy market. I don’t think that’s a good thing for the energy market. My experience is that it takes about a year to 18 months for things to get up to speed limit.

What concerns me is that I haven’t seen much about what BEIS is up to at the moment, and just a couple of minutes before this conversation this morning, that concern was expressed in a Solar Power Portal article just published.

I understand that concern at one level because we’ve suddenly gone from a standing start to, well, “what does Brexit mean?” There’s a feeling that there are now bigger priorities within government, and so I think there is increasing impatience, particularly around Contracts for Difference (CfD), things not being clear as to how they are actually going to work. You might find that if you spoke to individual corporates with an individual stake in that process they will be more up to speed than some of us. I think there has been some impatience on CfDs within individual companies, in that they’re not clear how things are going to work and that there are still some decisions to be made, that are actually quite big decisions.

Hinkley C caused quite a big delay because without knowing a decision on Hinkley it’s quite hard to decide what else is needed. If that was a real review and not a piece of window dressing [on Theresa May’s part] then it can be understood that the government would wait until that was decided before moving forward with other things. And it has a big effect in the market. However, it’s there now, so it will have a particular effect within a particular timeframe. Knowing how things work, I would expect a few more months of consultation yet before we start seeing any kind of announcements. That delay is not good, but they have to consult industry as well, to check how these things will work in practice.

What do you think Greg Clark will do in the near future to make the green economy pivotal to the UK’s future? Any guesses at this stage?

I think they will just look at the data and realise that the transformation of our energy market, from one based on an expensive and volatile fuel source to one that is based on sustainability and the abundance of wind and solar is good for the economy. For two reasons – it’s good for productivity, because it’s home-grown, because you have to make it yourself, it is good for the economy and thus it creates momentum. Secondly, it reduces energy costs. It’s not based on market volatility, it’s based on good technology and investing in better ways of doing it.

While we have had some benefits from a crazy oil market, that has been affected by big decisions in the Middle East, in Saudi Arabia and so on, that isn’t sustainable now. The Saudi’s are not going to tolerate that for too much longer, fracking has responded and we’re going to see big rises in energy prices. The downward momentum is within the costs for renewables, particularly offshore which has beaten expectation. For me that will increase UK productivity because energy costs are a big drag on growth and a big drag on productivity. I can’t see how fossil fuels is going to deliver that unless there is a significant change in the technology by which we burn fossil fuels. I am certainly not aware of any coming through.

Fracking is seen as a way of reducing energy prices but the Americans have shown that it doesn’t work like that. There’s a certain cost for going underground and if it goes below that it just stops producing. I know in America they are currently looking at the cost of fracking and trying to reduce labour costs and introduce new technology so they can compete with cheap oil from Saudi Arabia. One main effect of that is you’re going to see a lot more defaults on the debt on fossil fuel development and some of these companies basically fail in that goal. So why not instead bet on an industry that has actually shown it can reduce its costs? Rather than one that is good at producing defaults.

How do you think Brexit will affect the sector in the UK?

That depends on whether it’s a ‘hard Brexit’ or not. Energy is probably one of those areas that will be less affected. Some of the deals struck, particularly on interconnectors, might have to be rewritten, and I can’t see that happening in a positive way from a cost perspective. The tariffs and imports and so on, that’s one area where we helped to create the interdependencies and now we’re walking away from them. The French are not going to say “we are not going to sell you any more electricity” but by the same token their priorities will be more about the single European energy market than it will be about sending small amounts of surplus energy to the UK. So in that context, there’s been some quite big investment gone into interconnectors which will be far more risky in a Brexit world. There are other areas where the UK government could take another look, without the EU policy side, we might have a freer hand in terms of support the government can give to specific industries. There was some concern because the EU single market did slow down decision-making in certain things, particularly around state aid rules.

Personally, although wouldn’t agree with Brexit, as a business we just have to get on with things. I think that the green energy industry, given how much uncertainty we have had to deal with in the past is pretty good at that. I think we’re quite well positioned in a more uncertain policy world, because we’re used to it.

How do you see Abundance Investments relationship with the UK clean energy market changing and growing in the future?

We want to extend the types of investments we make. Renewables for us was always a stepping stone for a broader range of investments people can make into the economy. It was a good stepping stone because the projects are relatively straightforward with simple inputs and outputs so it’s a good place to start. Where we are now, we’ve lived through the era of policy changes and short-termism so we’re cautiously optimistic, we see a strong pipeline of deals but which are a lot more diverse in terms of the technologies we support.

We would like to see a world in which we can get back into supporting onshore wind as competitive, low-cost, mature, proven technology. There is 3.5 GW, £3.7 billion of consented projects, which may or may not get built depending on policy decisions this government makes. From our perspective, we would like to see some of that pipeline make it through and we would like to see the planning restrictions that are currently preventing a number of these sites from being repowered lifted. If you have an existing site you should be able to redevelop it so that it’s more efficient. But currently that isn’t happening.

In the broader sense, we see a number of other technologies, broader forms of biofuel, biomass and anaerobic digestion offering opportunities. We’re moving from being able to build smaller projects of around £1 million to larger projects of £3-4 million and so we’re looking at those other forms because they tend to be bigger projects. That’s quite exciting as it should see us through the next three quarters and then after that, who knows, but we’re cautiously optimistic about that future as well.

The core of the issue for us as an investment platform is that renewables, for us, is an opportunity for the UK to upgrade its energy infrastructure and do it in such a way that it will last for the next 60 years. However, that investment is all long-term. What we don’t have right now is a policy environment that positively supports that long-term investment horizon. What we would like to see is an industrial policy shifting away from short-term politics into what used to be called a long-term economic plan. I notice that language has disappeared, but there are good things to do with such a long-term economic plan, and one of those things is that you build your infrastructure so that it supports the growth of different industries. If that infrastructure is based on our own, home-grown, energy infrastructure and technology then why wouldn’t we do that?

Abundance is an ethical investment platform that aims to help make its customers long term goals a reality. It helps people to invest directly in projects that offer estimated returns of 6 – 9 percent internal rate of return, as well as social and environmental benefits. The company’s approach to investing is step by step, project by project, enabling people to take control of how their money helps build a better future for everyone and for the world we live in.

Bruce Davis is Abundance Investment’s co-founder and joint Managing Director. He is an anthropologist with a creative drive that helped create the world’s first peer to peer lender, www.zopa.com in 2004, as well as products and innovations for most of the UK leading banks and building societies. He is also a founding director of the UK Crowdfunding Association, a Trustee of the Finance Innovation Lab and Visiting Research Fellow at the Bauman Institute, Leeds University. Bruce invented Monkey Shoulder whisky, which has grown to become a global brand and heads up Abundance’s brand and marketing team.